What is Forex / Currency Trading?
The word Forex comes from the words Foreign Exchange. The Foreign Exchange market or the Forex market is the biggest market in the world. The daily earnings in the Forex market is around approximately 2 trillion dollars per day, which is much more than many other markets combined. Because of this huge earning, the foreign exchange market is one of the most enviable markets for Currency Trading. This market is also called Spot Exchange. This means immediate or simultaneous exchanges are performed using Forex Trading System.Currency Trading involves buying and selling of currencies in huge amounts to influence the shift in relative value into profits.There are different types of trading mechanisms such as Spread Trading,Swap Trading,Margin Trading etc.
The Forex market is also known as OTC market (Over the Counter) or Interbank market because in this market, the transactions are conducted between two parties over the telephone or via an electronic network or the internet.
Scroll down to learn more on Forex Trading,Currency Trading,Spread Trading,Swap Trading and Margin Trading.
What are the major currencies traded?
In Forex Trading, the following currencies are exchanged with each other in the Foreign Exchange market
USD: U.S. Dollar
GBP: British Pound
CHF: Swiss Franc
JPY: Japanese Yen
CAD: Canadian Dollar
EUR: Euro
How does Currency Trading work?
Currency Trading is done based on the currency exchange rate.The currency exchange rate is the rate at which one currency can be traded with the other. Currencies are always exchanged in pairs in Forex Trading system. Exchange rates rise and fall based on financial factors such as inflation, industrial production and geo-political situations of the country.(Also see Fundamental Analysis)
The person can make money using Forex Trading strategies in two ways. First, the person can buy currency at a low and then sell it high. Example, if the value of Euro and Swiss Franc is going high, you can buy the shares of the USD/Swiss and at the same time you can sell the USD/Euro while it is high and get a profit.
The other way of generating money using the Forex Online Trading System is in the interest accrued on each currency based on the bank rates. It is rather challenging for everyone who trade in the Foreign Exchange market, make money. Frequently new Forex Investors make the mistake of shooting into the Forex market without any proper training from Forex Traders. Because of this fact, normally 90 percent of all new investors are unsuccessful within the first year. To become successful Forex Traders, you must learn the ups and downs of Forex Trading. What is Trade Planning?
The Foreign Exchange Market does not have actual physical existence. It is mainly a large network of individual depositors and central banks, all occupied in the process of trading currency. The transactions done in Forex market is 24 hours a day and it follows all the main leading countries including The United States, Europe, and Asia.
A Trade Plan suggests the investor on how to make money in Forex.Trade planning is very crucial to Forex trading.Without a good trade plan one would not be able to achieve good profits.A trade plan contains a profit point and a loss point, profit generation levels and big money management strategies.One other benefit of having a solid trade plan is that it eliminates emotional decisions and self doubts in investors and provides more rational approach to trade. It defines better the entry and exit points in trading.(Also see Exit FOREX Strategy)
What is Spread Trading?
Spread Trading is based on futures spread.The spread is an extended and small futures point that provides disclosure to a spread or the difference in the two values/prices.If both the futures are traded on the same exchange, there could be two kinds of spreads/Spread Trading achieved.
Spread Trading is of two kinds:
Intra-commodity Spread Trading/Calendar Spread - In this case one of the spreads is long positioned and the other is held short.Both have the same underlier (derivative value) but different maturity points.
Inter-commodity Spread Trading- In this case both futures have the same maturity levels but different underliers for the long short positions.
To investors Spread Trading offers minimum risk as compared to trading absolute futures.This is because the long and short futures that comprise a spread are correlated, so they tend to hedge one another.For this reason exchanges have less strict margins for Spread Trading.
What is Swap Trading?
Swap Trading is the simultaneous buy and sell of the same quantity of given money/asset for two different dates, against the sale and purchase of another.In other words,Swap Trading is borrowing one currency/asset and lending another currency/asset for the same time period.Swap Trading is synonymous with the term 'Swap'.Swap Trading is used to hedge against risks.
There are 5 types of swaps/ Swap Trading strategies:
1. Interest Rate Swaps - Counterparties exchange Fixed and Floating interest rates.
2. Currency Swaps - Exchange specified amount of currency for another.
3. Credit Swaps - One party makes periodic payment to the other and receives promise of payoff if a third party defaults.The first party receives credit protection and is the buyer, whereas the other party provides credit protection and is the seller.
4. Commodity Swaps-Commonly used in Oil Trades, in this swap the user of the commodity will secure a maximum price and agree to pay a financial institution this fixed price.In return the user will get paid in market price of the commodity.
On the other side the producer of the commodity will contract with the financial institution at the market price,in return for fixed payments.
5. Equity Swaps - A set of future cashflows are exchanged.These cashflows are known as 'legs'.The cashflow stream can be adhered to a fixed/floating interest rate and called 'Equity Leg'.Another option is to leverage (See Leveraged Financing)based on stock market index performance and in this case called 'Floating Leg'.
What is Margin Trading?
Margin Trading is trading with rented finances and securities.It is mainly a leveraging technique in which investors borrow money for investing. In Margin Trading the investor can leverage their purchase power by borrowing money from brokers with upto fifty percent purchase value of the stock.It is like a loan from the brokerage.To perform Margin Trading,one needs a margin account,certified by a broker.Marginable securities are collateral and there is an interest levied on the borrowed amount.
Margin Trading holds good for short term investments and quick turn-arounds.
What is API Trading?
API Trades provide real time forex feeds.API's permit customers to embedd trading features into their own software systems.
What is Forex Signal?
Forex Signals are a pointer that shows the investor when it is a better time to buy or sell a currency pair in the Forex market.These signals are generated by automated forex trading systems like FOREX KILLER, 5EMAs FOREX, STEALTH FOREX, FXPS, FOREX AUTOPILOT, PROPHET1, FOREX FUNNEL etc.(Get more information on our Forex Product and Forex Software page)
Forex signals provide real time scenarios of Currency Trading in the Forex market.Forex trading signals are used by successful forex traders who observe the market 24/7 and provide with in-depth information.
